• Non-farm payrolls (NFP) are expected to rise 150k which would be above the average monthly gain of 116k over the prior 3 months.

• BOE Chief Economist Huw Pill leaned against Governor Andrew Bailey’s comments about the possibility of more aggressive rate cuts.

• Crude oil prices break higher. Dockworkers at U.S. East and Gulf coast ports call time-out on the strike. EU slaps additional tariffs on China-made electric cars.

The rally in the dollar index (DXY) paused after appreciating by over 1.6% this week. US equity futures are up slightly while Treasury yields are firmer on favorable U.S. growth expectations. Crude oil prices are breaking higher underpinned by the likelihood of Israel striking Iran’s energy sites. U.S. President Joe Biden said yesterday “we’re discussing” whether to support an Israeli attack on Iranian oil infrastructures.

The real prospect of a full-blown war between Iran and Israel will continue to dominate financial market action in the near-term. Absent this major geopolitical uncertainty, the global macro backdrop would be favorable for risk assets. China has turned-on the policy tap, and the Fed is dovish while the U.S. economy is strong.

Indeed, the U.S. economy remains in a good place. The ISM services index overshot expectations in September rising to a 19-month high at 54.9 (consensus: 51.7) vs. 51.5 in August. Business Activity and New Orders sub-indexes made the largest contributions to the pick-up in services sector growth momentum.

Disappointingly, the employment sub-index fell back below the 50 boom/bust threshold to a three-month low at 48.1. However, the September Challenger job report did not suggest a layoff spiral was underway. U.S.-based employers announced 72,821 cuts in September, a 4% decrease from the 75,891 cuts announced in August.

Fed funds futures have modestly trimmed odds for 75 bp of total rate cuts by year-end this week. Today’s September non-farm payrolls report can lead to a more material upward adjustment to the Fed funds future curve in favor of USD and Treasury yields (8:30am New York).

Non-farm payrolls are expected to rise by 150k following an increase of 142k in August which would be above the average monthly gain of 116k over the prior 3 months. The unemployment rate is projected to remain at 4.2% on an unchanged participation rate of 62.7%. Average hourly earnings are forecast to rise 0.3% m/m vs. 0.4% in August and remain at 3.8% y/y for a second consecutive month.

New York Fed President John Williams and Chicago Fed President Austan Goolsbee (2025 FOMC voter and staunch dove) will have an opportunity to comment on today’s non-farm payrolls report. Williams is scheduled to give opening remarks at an event called “The Future of New York City: Focus on Jobs” (9:00am New York). A text of his speech will be published but there is no Q&A session. Goolsbee gives a television interview an hour later (10:00am New York).

Dockworkers at U.S. East and Gulf coast ports will resume work today after suspending the strike until January 15. Bloomberg reports that the cargo backlog from three days of port closures is likely to take 12 days to clear. As such, the economic loss from the shutdown which began Tuesday is minimal.

GBP is holding on to most of yesterday’s losses triggered by Bank of England (BOE) Governor Andrew Bailey’s dovish curve ball. UK interest rate futures have trimmed odds for 50 bp of total cuts by year-end to 84% vs. 90% yesterday.

BOE Chief Economist Huw Pill pushed back this morning against his bosses’ comments about the possibility of more aggressive rate cuts. Pill concluded his speech by noting that “while further cuts in Bank Rate remain in prospect…it will be important to guard against the risk of cutting rates either too far or too fast”. Pill’s comments are not surprising as he was one of four MPC members who voted to hold rates steady in August. The BOE ultimately cut rates by 25 bp to 5.00% in a 5-4 split decision.

EUR/USD is range-bound near this week’s lows. As anticipated, the European Union voted today to impose tariffs as high as 45% on electric vehicles (EV) from China. The higher tariffs aim at reversing the declining domestic market share of European carmakers in the EV space. European carmakers’ market share for EVs in Europe fell from 80% in 2015 to 60% in 2023, while the share of Chinese carmakers in the European EV market rose from 5% to almost 15%. The up to 45% tariff more than offsets the approximately 30% higher overall vehicle productions costs in the EU compared to China.

USD/JPY retraced recent solid gains but is still up over 2.7% this week. Nevertheless, the looser for longer Bank of Japan (BOJ) policy stance can further weigh on JPY. Pre-election fiscal sweeteners are unlikely to change the BOJ’s more cautious approach to remove policy accommodation because most members view financial market as is still unstable. Japan’s Prime Minister Shigeru Ishiba instructed his cabinet to draw up a package of economic measures aimed at reducing the impact of high prices and support growth. A general election in Japan is set to take place October 27.

AUD/USD is consolidating near yesterday’s lows. Australian household spending unexpectedly stalled month-on-month in August (consensus: +0.5% m/m) after falling -0.5% m/m in July and June. The data is in sharp contrast to the retail trade number published Monday which showed sales surged 0.7% m/m in August. The household spending print is more comprehensive as it covers around 68% of household consumption, compared to the 33% covered by the retail trade data. Of note, the ABS plans to stop the retail trade publication in August 2025. Bottom line: we expect the RBA to cut the cash rate target by year-end because Australia underlying economic activity is weak and points to lower inflation pressures. RBA cash rate futures price-in 60% odds of a 25 bp cut by December.